I am the Founder of Community of Liberty, a chapter based organization committed to pursuing the art of living in liberty, a member of the Publication Committee of the Claremont Review of Books, an Advisor to TheGold StandardNow.org, and a juror for the Bastiat Prize for Journalism. I have just published with my co-author Ralph Benko the booklet, "The 21st Century Gold Standard: For Prosperity, Security and Liberty," now available as a free download at AGoldenAge.com. I bring to my columns an extensive background in the investment management business, including my experience as an equity portfolio manager, strategist, president of my former firm’s retail sales and marketing subsidiary and member of the parent firm’s management committee. As such, I have been a student and observer of the political/economy and its affects on markets, businesses, and my own business for more than 30 years.

The Rising Price Of the Falling Dollar

Do you know why oil and prices are moving sharply higher? Some blame the oil companies, charging they are manipulating prices. Others cite U.S. sanctions on Iran and the threat of a military encounter that would disrupt the flow of oil from the Middle East.

Speculators, too are blamed for ostensibly bidding up the price of oil. In the political arena, President Obama is taking credit for increased domestic oil production even as his critics point out the slow pace of drilling permits issued by his Administration soon will hamper additional increases in the U.S. oil production.

Yet, the basic reason for higher energy prices is being overlooked, even though it is right before our eyes: Oil prices are up because the value of the dollar is down. Our common sense hides this source of higher prices because we view the dollar as fixed, and prices as moving. News reports explain the sharp rise in consumer prices in February were caused by higher energy and food prices, implying that higher prices cause inflation. Of course, higher prices do not cause inflation. Higher prices are inflation.

The cost of this deception goes well beyond the vilification of the oil industry and free markets. The real price of the on-going debauchery of the dollar is measured by the loss of our prosperity and the debasement of our liberty.

Neither the dollar, nor the price of individual items are fixed. Changes in the relative prices of goods and services occur because of technological change or shifts in supply or demand. The price of computers and televisions fall relative to the price of, well, just about everything. On the other hand, the freeze earlier this winter in Florida reduced the supply of oranges, leading to an increase in the price of orange juice. But, the value of the dollar also changes, usually in ways that are imperceptible over short periods of time. As a consequence, when the dollar price of gasoline rises 6% in a month, as it did in February, it appears that the price of gasoline is up, rather than the value of the dollar is down.

To see more clearly how the price of the dollar has changed, it helps to view price changes over a 10 year period. Since 2002, the price of a barrel of oil has increased four-fold, to $107 last Friday from $26 in 2002. To suggest that oil companies had enough power to impose such a price increase, or that speculators are responsible for a quadrupling of the price of oil is, on its face, preposterous. Instead, the price of oil and gasoline are up because the Federal Reserve has driven the value of the dollar down.

For example, if the dollar since 2002 had been as good as the:

• Chinese yuan, the price of oil today would be $82 and a gallon of regular gas would cost about $3.10;

• Euro, the price of oil today would be $77 and regular gas would cost about $2.90;

• Japanese yen, the price of oil today would be $71 and regular gas would cost about $2.75;

• Swiss Franc, the price of oil today would be $63 and regular gas would cost about $2.50.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

Comments

As usual, you are wrong about sweet light crude, especially in the US. Do you ever get anything right? It is no longer 2005. Its 2012. The appetite for oil is growing, and production along with it.

####

U.S. onshore crude oil production forecasts have skyrocketed in recent months, along with rig counts, current production and any other measure of activity you can think of. The big dogs are Bakken, Eagle Ford and Permian – all of which yield light-sweet crude or even lighter condensates. As outlined here last week in ‘You’re doin’ fine, Oklahoma’, forecasts for U.S. crude oil production can be classified as high, very high and extremely high. BENTEK is in the very high camp, expecting an increase of 2.2 Bcf/d between 2011 and 2016. Raymond James is poster child for the extremely high crowd, coming in at an incremental 3.5 Bcf/d by 2015. (RJ rounds up to 4.0 Bcf/d in some of their materials.). All of the forecasts have one thing in common. It is all light sweet crude oil.

####

The reason that refineries are closing is because of the recession that started 4 years ago and which Obama and his wonderful economics policies and actions cannot halt. In case you had not noticed, oil demand is way down from 2005, which is where all your dated figures come from. Why do you insist on going back into the past to present an argument for changed circumstances?

Because perhaps you care only for your erroneous argument and not the facts.

Anyone can build a refinery, just as anyone can build a plant. Profitability will depend upon the type of refinery or plant built and prevailing market conditions.

Oil refining when gas prices are so high and the endless recession continues will not be a profitable venture.

I found this article to be very uninteresting, after reading a few of the blogs and articles that yours is regurgitating (as daviddelosangeles rightly pointed out, along with so many other things).

Frankly, as a scientist and mathematician, I find this kind of politically-motivated writing which clearly lacks rigor, thoroughness, and fact-based evidence to be extremely discouraging and a clear example of what is wrong with American media coverage today. It’s painfully obvious to anyone with a modicum of analytical ability that your argument is full of holes, and is loaded with nonconstructive finger-pointing in the place of economic theory.

I consider myself an independent, and I am encouraged and delighted whenever I find thoughtful and balanced discussions of economic, political, and social policy–regardless of which end of the spectrum they lean towards. What matters most to me is that the author has incorporated an honest and thorough analysis of facts, and has based their assertions on sound reasoning.

I find your writing to be woefully lacking in this regard!!

Your self-designated tagline is “I cover economic/political issues with liberty as my polar star.” Based on your writing, I would say that a more accurate line would be:

“I’m a star at taking liberties in covering economic/political issues based on polar thinking.”

Let me know if you’d like to switch to that, and we can talk royalties!

Was there not a huge run into the housing sector, causing prices to be artificially high? If it were not for the easy money policies of the Federal Reserve we may have see even LOWER housing prices than what you consider today’s low.

After 9/11 the Bush administration made it a priority to get the economy moving again by instituting a policy to increase exports. They accomplished this by beginning to devalue our currency through the Federal Reserve. This causes a temporary reduction in the currency translations and appears to make US goods cheaper, however the ECB and China (which is pegged to the USD) followed course and devalued their currencies as well to fight the apearance of cheaper US goods and services. Investors saw the devaluation as pressure on their investment returns, as more return was necessary to maintain the expected end of investment purchasing power, and headed to commodities that traditionally maintain PP. One of these commodities is real estate. REITs boombed and so did housing prices, except that it was creating a valuation bubble that burst in the fall of 2008. Valuations will remain low until the excess cash in circulation is absorbed through economic growth or a change in monetary policy.

This article completely ignores the biggest reason for the decline in the dollar since 2002, the lost and unnecessary war in Iraq. The article also ignores the second biggest reason for the decline in the dollar, Alan Greenspan being a political hack and keeping inerest rates low While Bush was turning the largest surplus in human history into the largest deficits in human history.

The value/strength of the dollar, which in and of itself has no value, is in very real terms the strength of America. I mean you can’t eat a dollar bill. That is the value of a dollar is only the value put on it by others.

For decades the world has accepted the dollar as the ood faith and credit of the USA in exchange for other all sorts of value from oil to cloths to DVD players. The problem is because of decisions made in 2002 that have weakened America in all ways including military and economics.

But what makes this article silly is the discussion of mandates. All of the currency compared with the dollar comes from countries that have stronger mandates on all these issues than does America. It has nothing to do with liberty unless you define liberty as the right to destroy not only yourself, but everyone.

I agree that the falling dollar is the real reason for much of America’s problems including the cost of gas. But let’s put the reason for the falling dollar where it belongs, as the cost of stupid wars and stupid unpaid for tax cuts for the richest Americans.

The monetary base has tripled since 2008. Obama has spent more money in three years than GWB did in 8. Didn’t Obama double troop levels in Afghanistan? I notice that you left that now unecessary and expensive war out of your post. Didn’t Obama extend the Bush Tax Cuts? Funny, you fail to mention that fact, too. However, the real culprit in this mess is our central banking system. Without it, our interventionist foreign policy and endless welfare state, both funded by monetary inflation, would be impossible. Blaming GWB for this mess is ahistorical. We can continue with partisan sniping, or start paying attention to the elephant in the room. End the Fed.

The negative interest rates charged by the Fed is exactly what has caused the devaluation of our currency.

Some minor points, the Iraq War and the War in Afghanistan, right or wrong, has cost $1 trillion over 10+ years. As large as the expense has been does not make up the total amount of debt accumulated by the Federal government. Also, the Bush/Obama tax cuts are a drop in the bucket against total federal spending. Federal expenditures are expected to balloon for two reasons, medicare and social security.

You wrote:”You can’t have a real economy, with fake money.” Every country in the world has “fake money”, as you term it, and has had it for several decades now. Most people would argue that the US economy was at its peak between 1950 and 1970 when the US had “fake money”. So perhaps not only is it possible to “have a real economy, with fake money”, perhaps is necessary.